In order to get great deals and best investments in the year 2016, you have to make a plan. You must be thinking that what one has is rough workings of a plan to scoop up the bargain investments in the year 2016? Well, yes. We do know that it is a little early for annual predictions, but the Opportunist radar has started flashing. In short, the emerging markets are already dirt cheap, and they could become even cheaper. Keeping this in mind, one is poised to select certain stock markets that promise great returns.
Firstly, the cheap bit. The performance in the developing markets has been worse than in the developed markets, which has left the prices unusually low.
Solid evidence of this exists, if one turns to neat calculation which is known as “Cape.” It compares the prices to the profits, just like the common ratio of earnings to prices, but smoothed over a decade in order to iron out the anomalies. This, in jargon, is the cyclically adjusted earnings to price ratio, hence the name. The lower the number is, the higher the future returns will be, as history tells. A German assets manager, StarCapital, crunches numbers every month, and the latest figures tell us a very simple story.
The emerging markets were 37 percent below the fair value. It was estimated that the US stock market was 25 percent too high. It is indicated by these numbers that, based on past events, the annual returns are going to be 3.6 percent for the next 15 years in the US versus the impressive 7.9 percent for the emerging markets.
Should we all rush to buy? Well, we believe that there might be a better opportunity. You might have noticed many headlines warning about the impending disaster for the emerging markets. It is because of imbalances in world economy that company debt in some of the emerging markets has ballooned, which is going to pose a problem when interest rates start rising in the US.
Instead of taking this in a negative way, it indicates that a better chance of buying on fear will emerge. A great hunting territory is provided for opportunists by the market panic.
Expected returns from stock markets of different regions over next fifteen years
Source is StarCapital, CAPE valuations.
| Region | Future Returns |
| US | 3.6% |
| World | 5.3% |
| Europe | 7.1% |
| Emerging Markets | 7.9% |
So what should one buy?
Cheapest countries, according to Cape, are those in which we have already invested a decent amount – like Brazil – or the ones which we would not touch even if it were to be cheapest of stock markets in the world. Like Russia.
We are considering the debt issue. Therefore, the hunt turns towards the frontier markets, towards countries that have the ingredients required to transform the fortunes but have low debts at present. The Philippines is one country that has great prospects. The Philippines has been on the radar for many years. It has a population of 98 million that is skilled and young. Widening consumer band is likely to emerge as government continues pushing through the reforms.
The spending on infrastructure has increased, as the GDP percentage has doubled in the last six years. However, at the same time, the debt-to-GDP ratio has seen a fall from 80 percent to about 45 percent, which is lower than 88 percent for the UK or 74 percent for Germany. Company debt is also low in the Philippines at 39 percent of the GDP, according to the data of the World Bank. The number for Britain is 141 percent.
How should one invest?
Alquity fund places some bold bets. It makes it more risky than the traditional rivals. On the other hand, it also means that while other Asian funds were affected by China’s slump, the effect on Alquity was much less.
They created a stock market list known as the “Super Seven” in Asia, and they have invested in it. Alquity keeps 40 percent of its money in the frontier markets. This includes a speculative bet of 4 percent on Burma. This is too much of risk even for the opportunists.
The Philippines is the 4th largest holding, with 9 percent invested in it. Alquity fund can be a good option. DB X-Trackers and the MSCI Philippines ETF fund, a tracker focused on this country, is a precise way of investing. On the Cape measure, this market at the moment is still 20 percent too high, but we will wait patiently for the right opportunity.
[Featured image credit: by Ken Teegardin, used under CC BY / Image cropped]